Grandfathering Can Seriously Damage Your Wealth: Due Diligence in Mergers and Acquisitions of Medical Device Companies

William M. Brown, Grandfathering Can Seriously Damage Your Wealth: Due Diligence in Mergers and Acquisitions of Medical Device Companies, 36 Gonz. L. Rev. 315 (2001).

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Consider this hypothetical scenario: In the early 1980s, Major Pharmaceutical & Medical Devices Company acquires Small Silicone Breast Implant Company, to function as a subsidiary. For several years, the acquired subsidiary manufactures and sells silicone gel breast implants at a substantial profit.[1] Then in 1988, the Food and Drug Administration (“FDA”)[2] informs the breast implant industry it will seek safety data from all manufacturers.[3] The FDA relies on powers given to it 12 years earlier in the 1976 Medical Device Amendments.[4] Silicone breast implants remain on the market while this data is gathered.[5]  Some data are eventually submitted by Major Pharmaceutical & Medical Devices Company and other companies in the industry.[6] The FDA reviews the data and deems them inadequate.[7] The FDA commissioner’s announcement of the inadequacy of the data[8] coupled with the decision on January 6, 1992, to call for a voluntary moratorium on the sale of breast implants[9] provokes an outcry that breast implants are dangerous.[10] Tens of thousands of women with breast implants contact their lawyers[11] and gather in an attempt to form a class.[12] Some are featured on “The Connie Chung Show,”[13] causing near hysteria in some women,[14] and starting an avalanche of products liability litigation against implant companies.[15] By now, Major Pharmaceutical & Medical Devices Company’s liability (potentially billions of dollars)[16] far outweighs any profits Small Silicone Breast Implant Company could ever possibly have made.[17]

Did the management of Major Pharmaceutical & Medical Devices Company improvidently acquire Small Silicone Breast Implant Company, thereby exposing Major Pharmaceutical & Medical Devices Company to these liabilities and legal bills? Or did management exercise sufficient “due diligence”?[18]… Read more

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